Internal Control Quality,Audit Quality And Earning Quality

In 1992, COSO issued the "Internal Control-Integrated Framework", which gave a new meaning and a more thorough system to the internal control. It became an original version in many countries. After Enron event the U.S congress issued the "Sarbanes-Oxley Act," which triggered a worldwide wave of establishing peremptory policy on enterprise internal control. In 2002 the Ministry of Finance issued the "standard for internal accounting control", trying to curb the occurrence of a number of financial fraud. But the standard focusing on internal accounting control obviously can not meet the need of economic and business development. Internal control should provide guarantees for the development of enterprises, thus the demand for expanding it to comprehensive internal control grew stronger. In 2006 Shanghai Stock Exchange and Shenzhen Stock Exchange were released guidelines for internal control of listed companies. The Shanghai Stock Exchange encouraged qualified listed companies to disclose internal control self-assessment report and the assurance report from accountant firm, and Shenzhen Stock Exchange required listed companies to disclosed internal control self-assessment report, and encouraged qualified listed companies to hire an accountant firm to audit the effectiveness of its internal control and issued an auditor's report. At the same time the Ministry of Finance together with other four ministries in 2006 issued "basic standard for enterprise internal control",which provides principal guidelines on establishing Internal Control to Listed Companies. During this period through self-examination or audit of internal control and other means, listed companies strengthened the construction and improvement of internal controls, but it still lacked of specific guidelines. Until April 2010 the Ministry of Finance together with other four ministries had formulated and published application guidelines for enterprise internal control and guidelines for assessment of enterprise internal control and guidelines for audit of enterprise internal control. It had formulated a complete system of enterprise internal control in china.Whether the COSO report or our basic standard, one of the objectives of internal control is providing reasonable assurance in that financial information is true and complete. As a key factor of financial information, a series of studies showed that internal controls was important in ensuring earnings quality. For example, Doyle et al (2007a) found U.S. companies, which had internal control deficiencies had significantly lower accruals quality. It indirectly showed that the company's internal controls can improve earnings quality. However, according to the present findings in our country, there is no unified conclusion on this research field. Zhang Guoqing (2007) found that in our current context internal control did not significantly improve earnings quality. Based on this research background, this article attempts to study the relationship between earnings quality and internal control quality, and the reciprocity between internal control and auditor in assuring earnings quality.In this paper, we choose audit of internal control as a proxy for high-quality internal control, and empirical studies suggest that high-quality internal control can significantly improve earnings quality of listed companies. Although high-quality audit of financial statement can improve earnings quality, this influence is not significantly. It has no significantly substitution effect between internal control and audit of financial statement. Contrarily, combining the two could well improve earnings quality. It implies that currently establishing and strengthening internal control is necessary and urgently in China.This study is helpful to clarify the relationship between earnings quality and internal control, and understand the relationship of internal control and audit in ensuring earnings quality. At same time it can provide guides for the construction and improvement of internal control, and internal control assurance engagements. Nevertheless, this empirical study of internal control is only a starting point for future empirical study, the research on internal control needs to be further expanded and improved.